A system dynamics model for assessing the impact of fiscal regimes on mining projects

Abstract

Mining-dependent economies heavily rely on the minerals sector to extract revenue for socio-economic development. The exploitation of mineral resources in these countries is made possible through local and foreign direct investment with little or no government participation. To extract revenue from the minerals sector different countries design mining fiscal regimes that integrate tax and non-tax elements. The designed regimes must maintain a balance between extracting revenue from the mining sector and leaving mining companies in business. However, achieving this is no easy task. The structures of mining fiscal regimes heavily depend on the models that are used in the design process. The current models (e.g., IMF FARI, and Colorado School of Mines (CSM) models) for evaluating mining fiscal regimes are static because they cannot assess variables as they evolve over the life of the mine project. Therefore, a system dynamics model has been developed to capture the dynamism of mining fiscal regimes by analysing technical and economic variables over time. To this end, the proposed model can be viewed as an extension rather than a replacement of the IMF FARI and CSM models. To illustrate its practical application, the model was applied to a case study to evaluate Zambia's copper taxation reforms based on a hypothetical mine project. Results show that the 2023 regime generates a lower financial and technical impact on a stylized hypothetical mining project when compared to the 2022 regime. A synopsis of results shows that over the 10 years production period, the 2023 regime generates lower profiles of average effective tax rate, effective tax rate, marginal effective tax rate, and Net Present Value (NPV) of government revenue when compared to the 2022 regime. These results imply that the 2023 regime is more attractive in capturing global mobile capital than the 2022 regime. Additionally, the 2023 regime is more attractive than the 2022 regime in terms of marginal flows of investment. However, the 2022 regime has a higher revenue-raising potential for the government than the former. In terms of sterilised reserves the 2022 regime generates a higher profile of values than the 2023 fiscal system (i.e., between 1-11 months and 36-120 months). However, this is with the exception of the 12-35 months where the 2023 regime has higher reserve sterilised values than the 2022 fiscal system.